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Three Key Challenges to Innovative Public Procurement

Innovation, in and of itself, is neither inherently good nor inherently bad. Simply implementing a new idea, process, product, service or technology will not automatically lead to sustainable and inclusive development.

However, if linked to specific priorities and with the right enabling environment, innovation can support national development priorities, stimulate job creation and be a key driver of development.

This is why strategies and funding for innovation are at the centre of many countries’ development priorities, including the European Commission’s recently announced budget[1], which allocates 25 per cent to financing not just innovation, but specifically low-carbon innovation.

Investment in innovation is emphasized in the Sustainable Development Goals (Goal 9) but it must be explicitly linked to sustainability for it to truly benefit citizens, the economy and the planet.

In recent years, public procurement has increasingly come to the forefront of the innovation agenda for a number of reasons. With increasing pressure on budgets, governments are looking at ways to better use the money they spend on public goods, services and infrastructure to achieve the best value-for-money for taxpayers. In that light, much emphasis has been placed on better and more strategic public procurement laws, policies and practices.

What is essentially lacking in the discussion around the cost of innovative sustainable procurement is the right information that enables public procurers to make a better business case.

It is also widely recognized that public procurement is an important demand-side instrument that governments can deploy to steer the economy in a more sustainable direction. Public procurement, on average, represents 15–20  per cent of a country’s GDP, making it a powerful market player. Because it is traditionally considered an administrative function of government, however, a lot of the potential advantages and multiplier benefits have not yet been realized. Much public procurement remains very compliance driven and not very innovative. Many public procurement agencies continue to buy yesterday’s technologies and are, therefore, a barrier to deploying innovative solutions. If this changes, and there are already examples out there of how it can change, public procurement will become an immensely powerful tool to stimulate innovation.

The figure below represents what Geoffrey Moore called, in 1991, the chasm between real innovative, first-mover technologies and the scale and deployment they are seeking on the market. The left side of the chasm is traditionally supported through research and development (R&D) funding and high-risk capital, while the right side of the chasm will find its buyers in the market. For sustainable development and all its related challenges, we do not just need innovation, we need instruments that bring innovations to the market–we need scale of good solutions. Public procurement of innovation can play a key role by bridging the chasm between the innovators and early adopters and the pragmatists to scale up early market technologies and make them mainstream.

Source: Geoffrey Moore (1991)

In Canada, for example, the Build in Canada Innovation Program identifies innovative solutions that the federal government can buy. As government purchase is so large, this helps bring innovative solutions to the market and provide the necessary scale.

This link between public procurement and innovation is becoming well recognized. The more difficult question lies with implementation. While public procurers experience a range of challenges in changing their profession from an administrative to a more strategic one, many examples of innovative public procurement are beginning to remove the uncertainties around it.

Where are the key challenges, and how do we overcome them?

In our work, we frequently come across three barriers for public procurers in their attempt to implement innovative public procurement: the legal framework, costs and the knowledge to design and evaluate tender documents to demand the best available solutions in the market.

We will discuss each of these briefly and provide examples of how they are being addressed.

The legal framework

For public procurers to know the best available solutions, they need to be able to engage in a transparent, open dialogue with suppliers. There is natural risk-aversion from public procurers to do so out of fear of allegations of corruption. Often they indicate that laws and regulations do not allow for such dialogue. This is also why a solid legal framework is essential, and why the principles of transparency, value-for-money, fair competition and non-discrimination must be central to every procurement process. In most jurisdictions, the legal framework allows for different forms of market engagement and enables the use of public procurement as a driver of innovation while adhering to these core principles.

The EU Public Procurement Directive (2014) is, in this regard, international best practice. It outlines different procedures of market engagement—such as competitive dialogue and competitive procedures with negotiation. It further emphasizes the importance of the Prior Information Notice, a notice that, in a pre-procurement phase, allows the public procurer to prepare the market for upcoming bids. It also introduces Innovation Partnerships as a separate procurement method that allows both for the purchase of R&D and the application of that R&D to public needs. The Innovation Partnerships were specifically designed for bringing innovative solutions to the market. In short, the EU Directive provides procedural certainty, which is an important component of making public procurers less risk-averse.

The cost barrier and the business case

When conversations with public procurers turn to the costs of sustainability and innovation, there is a lot of resistance to considering an item, solution or process that appears costlier than the business-as-usual alternative. In line with the principle of value-for-money, however, it is important to take a life-cycle or total-cost-of-ownership approach to a project. Public procurement decisions that are taken based on the price of acquisition, or the capital cost only, do not fully reflect the real cost. There are a variety of tools available for public procurers to calculate the life cycle costs of what they procure.

Public procurement agencies may also want to go a step further and include the costing of externalities in their decision making. The monetization of such externalities is not always easy, but it can be done. At IISD, we have made the business case for innovations in, among others, the cement, car and lighting industries by incorporating the cost of pollution or greenhouse gas emissions as a cost factor. A result of this modelling exercise can be found here. We have also developed a model that will help forecast the gains of procuring innovative infrastructure, as compared to the business-as-usual alternative, using our Sustainable Asset Valuation methodology (SAVi).

What is essentially lacking in the discussion around the cost of innovative, sustainable procurement is access to the right information that enables public procurers to make a better business case. If this information is not available, public procurers need to be equipped with the skills that enable them to extract that information from the market via the bidding process.

The public procurer skill set

Three specific aspects of the public procurers’ work need to be strengthened to fully utilize the potential of innovative, sustainable procurement: market engagement, the design and evaluation of performance-based tenders, and the monitoring of contracts on compliance with the promised performance.

Investment in innovation is emphasized in the Sustainable Development Goals (Goal 9), but it must be explicitly linked to sustainability for it to truly benefit citizens, the economy and the planet.

Given that procurers traditionally are more used to the administrative part of their jobs, guidance and training need to be provided to “skill-up” their profile. Recent engagement with the Western Cape Government in South Africa demonstrated that public procurers are asking for examples and case studies of innovative public procurement and guidance on how they can implement this in their own jurisdiction. As a response, we developed the Moving Towards Sustainable Performance-Based Procurement guidebook. This is just one of many tools that provides a step-by-step approach for innovative public procurement. It includes examples and case studies of innovative procurement, including how the procurement agency has engaged with suppliers and which performance-based specifications they have included in the tender documents.

Public procurers also need to be given time and resources to develop these skills. For example, as part of its Horizon 2020 innovation fund, the EU supports innovative public procurement. Part of this funding scheme supports the actual acquisition of the innovative solution, and another part of the funding is used for capacity building in public agencies. This funding is important to supporting a change in using public procurement as a strategic government function.